St. Louis Fed President Alberto Musalem said he favored raising interest rates by 25bps at last week’s FOMC meeting, arguing that acting gradually now would be preferable to risking more aggressive tightening later. Musalem is not a voting member of FOMC this year, so his preference was not among the three formal dissents against the decision to hold rates steady. Speaking in Brazil on Thursday, Musalem said inflation is likely to remain too high relative to Fed’s 2% target over coming year if policy stays unchanged. “Earlier gradual incremental interest rate increases are preferable, less disruptive, less costly than potentially later, more abrupt interest rate changes,” he said.
Musalem also pushed back against idea that Fed should hesitate simply because financial markets are not positioned for higher rates. While acknowledging that he closely monitors market signals, he said policymakers should follow their economic assessment regardless of prevailing expectations. “If you think that now is the time to change policy in whatever direction, you ought to change that policy, irrespective of what’s priced into markets,” Musalem said, adding that “there are times or moments when it’s okay to surprise the market.” His comments are particularly relevant as investors have moved toward pricing a September hold following falling oil prices and optimism over reopening Strait of Hormuz.
Musalem’s broader argument was that Fed has little reason to tolerate elevated inflation in hope that stronger productivity eventually resolves price pressures. “It is crucial that monetary policy put a meaningful restraint on underlying inflation, rather than tolerating somewhat higher inflation today to pursue productivity growth tomorrow,” he said, warning there is “fertile ground for inflation expectations to potentially become unanchored.” With financial conditions supportive, asset prices elevated and labor market characterized by “solid payroll growth,” Musalem sees room to tighten policy before inflation becomes harder to contain. His stance therefore adds to hawkish pressure inside Fed just as markets increasingly bet that September will bring another hold.
Key Takeaways
- St. Louis Fed President Alberto Musalem favored a 25bps rate hike at last week’s FOMC meeting, arguing current policy may not be restrictive enough to bring inflation sustainably back to 2%.
- Musalem favors earlier, gradual tightening, saying incremental increases now would be “less disruptive” and “less costly” than potentially larger rate moves later.
- He stressed that market pricing should not dictate Fed decisions, saying policymakers should act when warranted “irrespective of what’s priced into markets.”
- Musalem added that “there are times or moments when it’s okay to surprise the market,” a notable warning as investors increasingly lean toward a September hold.
- He rejected tolerating above-target inflation in hope that future productivity gains will solve the problem, warning such an approach could put Fed credibility and anchored inflation expectations at risk.
- With economy resilient, financial conditions supportive and labor market stable, Musalem sees room for Fed to focus on inflation rather than wait for clearer economic weakness before tightening.
